Louisiana Insurance Market Overview: Toward Viable Insurance Markets in the PostKatrina

1
Louisiana Insurance Market OverviewToward
Viable Insurance Markets in the Post-Katrina
Rita Era

• Louisiana REALTORS Spring Conference
• Baton Rouge, LA
• May 2, 2007

Robert P. Hartwig, Ph.D., CPCU, President
Chief Economist Insurance Information Institute ?
110 William Street ? New York, NY 10038 Tel
[phone] ? Fax [phone] ?
bobh_at_iii.org ? www.iii.org
2
Presentation Outline

• Louisiana Insurance Market Overview
• Review of Louisiana Hurricane Vulnerability
• Louisiana Claim Detail Hurricanes Katrina Rita
• 2007 Hurricane Season Preview
• Flood Risk NFIP Issues
• What Does the Future Hold for LA Property Owners?
• The Truth About Insurer Profitability
• Profitability
• Reinvesting Rebuilding Claims Paying Capacity
• Maintaining Financial Strength Security Ratings
• The Role of Government in Insurance Markets
• Review of National Catastrophe Plan Proposals
• Florida Legislation
• Katrina Litigation Update Compounding the
  Uncertainty

3
Louisiana Insurance Market Overview
4
Louisiana InsuranceMarket Facts

• LA P/C insurance premium volume in 2005 was 7.70
  billion, or 1.61 of the US total of 478.5
  billion
• LA Homeowners insurance premium volume in 2005
  was 1.01 billion, or 1.75 of the US total of
  57.5 bill.
• Insured Katrina Rita homeowners losses of 12.7
  billion in LA were nearly 13 times the 2005
  premiums of 1.01 billion
• In MS, HO losses wiped out 17 years of premiums
• The 2005 hurricane losses in homeowners insurance
  wiped out 25 years of premium and every dollar of
  profit ever made in the history of the state in
  this line
• Homeowners insurers in LA had earned profits of
  only 17.3 million, including investment income,
  since 1985.

Source Insurance Information Inst. from
National Underwriter Highline annual statement
database PCS.
5
Louisiana Mississippi Market Shares, All Lines
Homeowners
ALL LINES ( Billions)
HOMEOWNERS ( Millions)
LA accounts for less than 2 of the US insurance
market but 51 of 2005 hurricane losses
Source Insurance Information Institute from
National Underwriter Highline annual statement
database.
6
Average Expenditures on HO Insurance, 2004 vs.
1997
Hurricane makes insurance in Gulf Coast states
the most expensive in the US
7
Average Expenditures on HO Insurance, LA vs.
U.S., 1997-2004
Change 1997-2004 Louisiana 61.3 US 60.2
8
New Privately Owned Housing Units Authorized in
Louisiana
Post-Katrina Building Boom In 2006 Louisiana
authorized its second highest ever number of
housing units
Unadjusted Units Includes single and
multi-family dwellings. Source US Census Bureau.
9
Average Commercial Rate Change,All Lines,
(1Q2004 4Q2006)
Magnitude of rate decreases has diminished
greatly since mid-2005 but is growing again
KRW Effect
Source Council of Insurance Agents Brokers
Insurance Information Institute
10
Percent of Commercial Accounts Renewing
w/Positive Rate Changes, 2nd Qtr. 2006
Largest increases for Commercial Property
Business Interruption are in the Southeast,
smallest in Midwest
Source Council of Insurance Agents and Brokers
11
Percent of Commercial Accounts Renewing
w/Positive Rate Changes, 4th Qtr. 2006
Largest increases for Commercial Property
Business Interruption are in the Southeast, but
are diminishing Smallest in Midwest
Source Council of Insurance Agents and Brokers
12
LA Citizens Insured Exposure, All Wind Zones,
2004-2006 ( Billions)
Louisiana Citizens exposure grew by 4.6 billion
or 32.2 from 2004 and 2006
Source LA Citizens
13
Major Residual Market Plan Estimated Deficits
2004/2005 (Millions of Dollars)
Hurricane Katrina pushed all of the residual
market property plans in affected states into
deficits for 2005, following an already record
hurricane loss year in 2004
MWUA est. deficit for 2005 comprises 545m in
assessments plus 50m in Federal Aid. Source
Insurance Information Institute
14
Market Share of Top 10 HomeInsurers in
Louisiana, 2004

• The Top 10 companies had 83.5 of the Louisiana
  homeowners market in 2004
• There were a total of 51 insurers writing HO
  coverage in LA in 2004, 28 w/market shares under
  1, 17 with premiums under 1 million
• Many insurers active elsewhere in the US will not
  write in coastal states

Source Insurance Information Institute from
National Underwriter Highline annual statement
database.
15
Total Value of Insured Coastal Exposure (2004,
Billions)
Louisiana had 209 billion in insured coastal
property exposure in 2004, 7th highest of any
hurricane exposed state
Source AIR Worldwide
16
Value of Insured Residential Coastal Exposure
(2004, Billions)
Louisiana had 88 billion in insured residential
coastal property exposure in 2004 (42 of all LA
coastal exposure), 7th highest of any hurricane
exposed state
Source AIR
17
Value of Insured Commercial Coastal Exposure
(2004, Billions)
Louisiana had 121 billion in insured commercial
coastal property exposure in 2004 (58 of all LA
coastal exposure), 7th highest of any hurricane
exposed state
Source AIR
18
Insured Coastal Exposure as a of Statewide
Insured Exposure (2004, Billions)
Louisiana coastal exposure accounts for 37.9 of
all insured exposure statewide, 6th highest of
any state
Source AIR Worldwide
19
CATASTROPHE LOSSES IN LOUISIANAA Look Back
20
Insured Loss Claim Count for Major Storms of
2005
Hurricanes Katrina, Rita, Wilma Dennis produced
a record 3.3 million claims
Property and business interruption losses only.
Excludes offshore energy marine losses. Source
ISO/PCS as of June 8, 2006 Insurance Information
Institute.
21
Number of Homes Destroyedby Major Hurricanes
Katrina appears to have destroyed 10 times as
many homes as Andrew in 1992 or the 4 storms to
hit Florida and the Southeast in 2004
Destruction is defined as a structure made
uninhabitable or damaged beyond economic repair.
Source National Association of Home Builders,
National Red Cross (as of 9/15/05).
22
Hurricane Katrina Claim Status on Storms 1st
Anniversary
95 of the 1.2 million homeowners insurance
claims in Louisiana Mississippi are settled,
with just 2 in dispute
Hurricane Katrina made its north Gulf coast
landfall August 29, 2005. Source Insurance
Information Institute survey, August 2006.
23
Top 10 Most Costly Hurricanes in US History,
(Insured Losses, 2005)
Seven of the 10 most expensive hurricanes in US
history occurred in the 14 months from Aug. 2004
Oct. 2005 Katrina, Rita, Wilma, Charley, Ivan,
Frances Jeanne
Sources ISO/PCS Insurance Information
Institute.
24
Hurricane Katrina Insured Loss Distribution by
State ( Millions)
Louisiana accounted for 62 of the insured losses
paid and 56 of the claims filed
Total Insured Losses 40.579 Billion
As of June 8, 2006 Source PCS division of ISO.
25
Hurricane Katrina Claim Count Distribution by
State
Louisiana accounted for 62of insured losses paid
and 56 of claims filed
Total Claims 1,743,800
As of June 8, 2006 Source PCS division of ISO.
26
Louisiana Katrina Loss Distribution by Line (
Billions)
Louisiana insured losses are estimated at 25.275
billion from 975,000 claims. Excludes 2-3B in
offshore energy losses
As of June 8, 2006 Source PCS division of ISO.
27
Hurricane Rita Claim Count Distribution by State
Louisiana accounted for 48.3 of the insured
losses, Texas 44.6. Excludes offshore energy
losses of 2-3B
Total Claims 383,000
As of June 8, 2006 Source PCS division of ISO.
28
Louisiana Rita Loss Distribution, by Line (
Millions)
Total insured losses are estimated at 2.9125
billion from 185,000 claims.
As of June 8, 2006 Source PCS division of ISO.
29
LA Average Cost per Claim by Type of Claim and
Storm
Commercial (business) claims are about 10 times
more expensive than homeowners claims on average.
Katrina HO claims 22 more expensive than Rita.
As of June 8, 2006 Source PCS division of ISO.
30
Hurricane RiskAn Insurance Industry Perspective
31
U.S. Insured Catastrophe Losses
Billions
100 Billion CAT year is coming soon
2006 was a welcome respite. 2005 was by far the
worst year ever for insured catastrophe losses in
the US, but the worst has yet to come.
Excludes 4B-6b offshore energy losses from
Hurricanes Katrina Rita. Note 2001 figure
includes 20.3B for 9/11 losses reported through
12/31/01. Includes only business and personal
property claims, business interruption and auto
claims. Non-prop/BI losses 12.2B. Source
Property Claims Service/ISO Insurance
Information Institute
32
Mean Return Period for Major (CAT 3,4,5)
Hurricanes in TX, LA, MS, 1851-2006
Major storms hit LA every 18-24 years
Source The Deadliest, Costliest and Most
Intense US Tropical Cyclones from 1851 to 2006,
NOAA Technical Memorandum NWS TPC-5, April 2007
Insurance Information Institute.
33
Inflation-Adjusted U.S. Insured Catastrophe
Losses By Cause of Loss, 1986-2005¹
Insured disaster losses totaled 289.1 billion
from 1984-2005 (in 2005 dollars). Tropical
systems accounted for nearly half of all CAT
losses from 1986-2005, up from 27.1 from
1984-2003.
1 Catastrophes are all events causing direct
insured losses to property of 25 million or more
in 2005 dollars. Catastrophe threshold changed
from 5 million to 25 million beginning in 1997.
Adjusted for inflation by the III. 2 Excludes
snow. 3 Includes hurricanes and tropical storms.
4 Includes other geologic events such as volcanic
eruptions and other earth movement. 5 Does not
include flood damage covered by the federally
administered National Flood Insurance Program. 6
Includes wildland fires.
Source Insurance Services Office (ISO)..
34
The 2007 Hurricane SeasonPreview to Disaster?
35
Outlook for 2007 Hurricane Season 85 Worse Than
Average
Average over the period 1950-2000. Source
Philip Klotzbach and Dr. William Gray, Colorado
State University, April 3, 2007.
36
Probability of Major Hurricane Landfall (CAT 3,
4, 5) in 2007
Average over the period 1950-2000. Source
Philip Klotzbach and Dr. William Gray, Colorado
State University, April 3, 2007.
37
Number of Major (Category 3, 4, 5) Hurricanes
Striking the US by Decade
1930s mid-1960s Period of Intense Tropical
Cyclone Activity
Mid-1990s 2030s? New Period of Intense Tropical
Cyclone Activity
10
Tropical cyclone activity in the mid-1990s
entered the active phase of the multi-decadal
signal that could last into the 2030s
Already as many major storms in 2000-2005 as in
all of the 1990s
Figure for 2000s is extrapolated based on data
for 2000-2005 (6 major storms Charley, Ivan,
Jeanne (2004) Katrina, Rita, Wilma
(2005)). Source Tillinghast from National
Hurricane Center http//www.nhc.noaa.gov/pastint.
shtm.
38
The Flood Insurance Purchase Retention
DecisionFlood Insurance is a Tough Sell
39
Hurricane Katrina NFIP Flood Claim Count and
Closed Claim Losses Paid
85 of the 18.3 billion in NFIP flood losses
paid from Katrina were in Louisiana. MS accounted
for 13.
As of 12/8/06, 98.7 of all Katrina claims had
been closed. Paid amounts displayed are for
closed claims only. Source National Flood
Insurance Program as of December 8, 2006
Insurance Information Institute.
40
Total Claim Payments by State (Top 11) Jan 1,
1978 - Feb. 2006
Louisiana and Mississippi rank 1st and 4th
respectively in terms of total claims payments
(up from 3rd and 11th pre-Katrina). Florida ranks
2nd and Texas 3rd.
Source FEMA, National Flood Insurance Program
(NFIP)
41
Flood Insurance Penetration RatesTop 25
Counties/Parishes in US
LA parishes have among the highest flood coverage
penetration rates in the US (12 of the top 75)
As of 12/31/05. Source New Orleans
Times-Picayune, 3/19/06, from NFIP and US Census
Bureau data.
42
Flood Insurance Penetration RatesCounties/Parish
es Ranked 26-50
Mid-Atlantic/Northeast Counties are
underrepresented
People along the eastern seaboard have not gotten
the message
As of 12/31/05. Source New Orleans
Times-Picayune, 3/19/06, from NFIP and US Census
Bureau data.
43
Flood Insurance Penetration RatesCounties/Parish
es Ranked 51-75
MS coastal counties rank abysmally low
Barnstable is only county in all of New England
among Top 75
As of 12/31/05. Source New Orleans
Times-Picayune, 3/19/06, from NFIP and US Census
Bureau data.
44
Flood Insurance Retention Rates,March
2005-February 2006
Flood insurance retention rates are a problem.
Program lapse rate is too high. Customer
acquisition is expensive.
Source FEMA/NFIP web site accesses 5/8/06
http//www.fema.gov/business/nfip/statistics/stats
.shtm.
45
Reasons Why People BuyFlood Insurance
Risk aversion and compulsion are the two most
important direct factors influencing the purchase
decision. Educational attainment income are
also factors.
Source Poll of 700 conducted by Opinion
Research Corporation by Chubb Group of Insurance
Companies, summarized in March 2006 press release
Katrina Doesnt Motivate Many Homeowners to
Protect Their Investment.
46
Additional Factors Influencing NFIP Flood
Penetration Rates

• Education/Income of Homeowner
• Tendency to Decline Most Optional Coverages
• Only 13 of CA homeowners buy earthquake
  insurance
• Lack of Understanding of Actual Risk
• Most people do not understand the meaning or
  implications of 1-in-100 year flood risk
• Most people have never looked at a flood map
• Coverage Limits (e.g., 250K cap)
• Expectation of Post-Event Aid
• Potentially a more important factor for future
  events
• Litigation Suggesting that Flood is Covered Under
  Standard Homeowners Insurance Policies

Source Insurance Information Institute
47
The Media Flood Insurance Little
CoverageBefore Storms
48
Media Coverage of Flood Insurance, 2000-2007
Newspaper coverage as of May 2, 2007.
Includes newspapers, magazines, wire services,
etc. Source Insurance Information Institute
analysis based on Nexis search.
49
Media Coverage of Flood Insurancein the US
Overall, 2000-2007
US newspaper coverage of flood insurance rose an
estimated 194 between 2003 and 2006 and rose
278 across all print media
Newspaper coverage as of May 2, 2007. Includes
newspapers, magazines, wire services,
etc. Source Insurance Information Institute
analysis based on Nexis search.
50
Media Coverage of Flood Insurancein LA MS,
2000-2007
Media coverage of flood insurance in Louisiana
rose an estimated 739 between 2003 and 2006 and
980 in Mississippi. Coverage rose 194 for the
US overall. Surprisingly, coverage fell in 2004
despite major FL storms nearby Ivan flooding.
Newspaper coverage as of May 2, 2007. Source
Insurance Information Institute analysis based on
Nexis search.
51
What Does theFuture Hold for Louisiana Buyers of
Insurance?
52
What the Future Holds for Louisiana Home/Business
Property Owners

• Effects Concentrated in Southern Louisiana
• Market Needs to Reach a New Equilibrium to
  Stabilize
• Price of Insurance Rising to Adjust to Higher
  Plateau of Risk Going Forward Over Period of
  Years
• Inducement to attract/retain capital Not
  recoupment of 2005
• Reinsurance pricing leveling off as capital flows
  in
• Commercial prices will stabilize first because of
  greater flex.
• Reduced Supply as Some Insurers Restrict New
  Sales
• Citizens will become the only option for some
• Assessments from Citizens
• Especially if significant growth before next
  event
• Coverage Emerges Through Surplus Lines Mkt.
• Experimentation with Take-Out Programs?
• Alternative Risk Transfer Securitization?

53
Factors that Will Increase Private Insurance
Sector Receptivity to Operating in Louisiana

• Opportunity to earn a fair rate of return given
  the extraordinary risk being assumed
• Ability to move capital in and out of the state
  with relative ease
• Investors dont want to put money into a capital
  trap
• Analogy If oil prices capped, little investment
  would occur
• Price/Rate Flexibility Some want federal
  regulator
• Stronger Building Codes Enforcement
• Wise land use policies help
• Investment in Mitigation Measures
• Improvement in Tort Environment
• Strong Working Partnership with Major
  Stakeholders
• Absence of Punitive Measures that Create
  Unfavorable Operating Environment

54
KATRINA The Legal Storm No Silence in the
Court
55
Likely Market Impacts of Post-Katrina Litigation

• Litigation Creates an Additional Layer of
  Uncertainty in What is Already a Very Difficulty
  Market
• Ultimate Thrust of Litigation is to Compel
  Insurers to Pay Water Damage (Flood/Surge) Losses
  for Which They Have Never Received A Penny in
  Premium
• Some Courts Apparent Willingness to
  Retroactively Rewrite Long-Standing, Regulator
  Approved Terms Conditions of Insurance
  Contracts Creates an Unpriceable Risk
• Compounded by juries willing to award millions in
  punitives
• People Discouraged from Buying Flood Coverage
• BOTTOM LINE Weather, Courts, Juries Together
  Create Nearly Impossible Operating Environment
• Coverage Under These Circumstances Will
  Necessarily Become More Expensive, Less Available

56
INSURER PROFITABILITYThe Truth About Insurer
Profitability
57
ROE P/C vs. All Industries 19872008E
P/C profitability is cyclical, volatile and
vulnerable
Sept. 11
Hugo
Katrina, Rita, Wilma
Lowest CAT losses in 15 years
Andrew
Northridge
4 Hurricanes
2007-08 P/C insurer ROEs are I.I.I.
estimates. Source Insurance Information
Institute Fortune
58
2006 Return on Shareholder Equity (ROE)
Ranking for Key Industries in LA
2
3
10
Insurer profitability in 2006 was well below that
of many key LA industries and below the All
Industry median of 15.4
17
25
29
30
36
Source Fortune, April 30, 2007 edition
Insurance Information Institute
59
Profitability Peaks Troughs in the P/C
Insurance Industry, 1975 2008F
197719.0
198717.3
200614.0
10 Years
199711.6
9 Years
10 Years
1975 2.4
1984 1.8
1992 4.5
2001 -1.2
2007-08 P/C insurer ROEs are I.I.I.
estimates. Source Insurance Information
Institute ISO, A.M. Best.
60
Strength of Recent Hard Markets by NWP Growth
1975-78
1984-87
2001-04
2006-2010 (post-Katrina) period could resemble
1993-97 (post-Andrew)
2005 biggest real drop in premium since early
1980s
2007-10 figures are III forecasts/estimates.
2005 growth of 0.4 equates to 1.8 after
adjustment for a special one-time transaction
between one company and its foreign parent.
2006-2008 figures from III Groundhog Survey.
Note Shaded areas denote hard market
periods. Source A.M. Best, Insurance
Information Institute
61
Share of Losses Paid by Reinsurers, by Disaster
Reinsurance is playing an increasingly important
role in the financing of mega-CATs Reins. Costs
are skyrocketing
Excludes losses paid by the Florida Hurricane
Catastrophe Fund, a FL-only windstorm reinsurer,
which was established in 1994 after Hurricane
Andrew. FHCF payments to insurers are estimated
at 3.85 billion for 2004 and 4.5 billion for
2005. Sources Wharton Risk Center, Disaster
Insurance Project Insurance Information
Institute.
62
Reinsurance Markets are Globally Linked
Global Reinsurance Market
Premiums Ceded
States like LA, MS paid little into the global
reinsurance pool but got a lot in return,
shrinking global claims paying resources and
pushing up reinsurance costs for all
Losses Paid
63
Ratio of Reinsurer Loss Underwriting Expense to
Premiums Written, 1985-2006
Despite the respite in 2006, reinsurers paid an
average of 1.11 in loss and expense for every 1
in written premium since 1985
Source Reinsurance Association of America.
64
Key Messages on Profitability

• Level of profitability in 2006 was reasonable
  necessary to compensate investors for the risks
  they assume and to attract/retain capital
• All of the profits earned in 2004 and 2005 and
  most of the profits in 2006 were earned in states
  and from types of insurance unaffected by the
  hurricanes
• By law, the rates charged for insurance are based
  exclusively on past and expected losses in that
  state
• Profits in other states or from other types of
  insurance cant be used to subsidize cat-impacted
  areas/coverages

65
REBUILDING CAPACITY Profits are Being
Reinvested Banked for Future Catastrophes
66
U.S. Policyholder Surplus 1975-2006
Capacity as of 12/31/06 was 487.1B (est.), 14.4
above year-end 2005, 71 above its 2002 trough
and 46 above its 1999 peak.
Billions
Foreign reinsurance and residual market
mechanisms absorbed 45 of 2005 CAT losses of
62.1B
Surplus is a measure of underwriting capacity.
It is analogous to Owners Equity or Net Worth
in non-insurance organizations
Source A.M. Best, ISO, Insurance Information
Institute.
67
Capital Raising by Class Within 15 Months of KRW
Billions
Insurers Reinsurers raised 33.7 billion in the
wake of Katrina, Rita, Wilma
Source Lane Financial Trade Notes, January 31,
2007.
68
Annual Catastrophe Bond Transactions Volume,
1997-2006
Catastrophe bond issuance has soared in the wake
of Hurricanes Katrina and the hurricane seasons
of 2004/2005
Source MMC Securities and Guy Carpenter
Insurance Information Institute.
69
FINANCIAL STRENGTH RATINGS Industry Has
Weathered the Storms Well
70
P/C Insurer Impairments,1969-2006
The industrys underlying financial strength
allowed insurers to bear record catastrophe
losses with minimal impairments
Source A.M. Best Insurance Information
Institute
71
Overview of Proposed National Catastrophe
Insurance Plan
72
NAICs Comprehensive National Catastrophe Plan

• Proposes Layered Approach to Risk
• Layer 1 Maximize resources of private insurance
  reinsurance industry
• Includes All Perils Residential Policy
• Encourage Mitigation
• Create Meaningful, Forward-Looking Reserves
• Layer 2 Establishes system of state catastrophe
  funds (like FHCF)
• Layer 3 Federal Catastrophe Reinsurance Mechanism

Source Insurance Information Institute
73
Comprehensive National Catastrophe Plan Schematic
1500 Event
National Catastrophe Contract Program
150 Event
State Regional Catastrophe Fund
Private Reinsurance
State Attachment
Personal Disaster Account
Private Insurance
Source NAIC, Natural Catastrophe Risk Creating
a Comprehensive National Plan, Dec. 1, 2005
Insurance Information. Inst.
74
Legislation has been introduced and ideas
espoused by ProtectingAmerica.org will likely get
a more thorough airing in 2007/8
75
Would the Florida Approach Work in
Louisiana?Can the State Do It Better, Faster
Cheaper?
76
Why There is Concern Over the Florida
Legislatures Governors Changes

• Risk is Now Almost Entirely Borne Within State
• Virtually Nothing Done to Reduce Actual
  Vulnerability
• Creates Likelihood of Very Large Future
  Assessments
• Potentially Crushing Debt Load
• State May be Forced to Raise/Levy Taxes to Avoid
  Credit Downgrades
• Many Policyholder Will See Minimal Price Drop
• Savings came from canceling recent/planned rate
  hikes
• Residents in Lower-Risk Areas, Drivers, Business
  Liability Policyholders Will Come to Resent
  Subsidies to Coastal Dwellers
• Governors Emergency Order for Rate Freezes
  Rollbacks Viewed as Unfair Capricious

Sources Insurance Information Institute.
77
Pre- vs. Post-Event in FL for 2007 Hurricane
Season
80.0B
There is a very significant likelihood of major,
multi-year assessments in 2007
55.0B
49.5B
Billions
43.8B
35.0B
Total 20.0 Billion
25.0B
Notes Pre-event funding includes funds available
to Citizens, FHCF and private carriers plus
contingent funding available through private
reinsurance to pay claims in 2007. Post-event
funding is on a present value basis and does not
include financing costs. Probabilities are
expressed as odds of a single storm of this
magnitude or greater happening in 2007. Source
Tillinghast Towers Perrin, Study of Recent
Legislative Changes to Floridas Property
Insurance Mechanisms, 3/07.
78
Public Attitude Monitor 2006 Unfairness of
Policyholder Subsidies
Most non-coastal policyholders believe premium
subsidies for coastal property owners are unfair
Coastal States
Source Insurance Research Council
79
Public Attitude Monitor 2006 Unfairness of
Taxpayer Subsidies
Most non-coastal dwellers believe taxpayer
subsidies for coastal property owners are unfair
Coastal States
Source Insurance Research Council
80
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